Educational Articles

Dow-30 Earnings: AT&T Inc.--First Quarter 2012

Justin Hellman
| April 24, 2012

Telecom giant and Dow-30 component AT&T (T – Free AT&T Stock Report) has reported first-quarter results that were something of a mixed bag. Share net of $0.60 for the period, while in line with our estimate, beat Wall Street's consensus view by $0.03, thanks to better-than-expected wireless margins, welcome stability from the traditional wireline business, and considerable activity on the stock-buyback front. (The company repurchased 67.7 million shares during the March interim for $2.1 billion.) But key wireless subscriber trends were on the soft side, as competition from archrival Verizon, which now sells its own version of Apple's popular iPhone, appeared to stiffen. The stock traded notably higher, nonetheless, as investors seemed to focus on the positive aspects of the earnings release.

Indeed, AT&T struggled to sign new mobile phone customers up for contract-based plans in the quarter. (Contract policies, often two years in length, are far more profitable than no-contract plans.) iPhone sales were particularly sluggish, with 4.3 million iPhones activated in the first three months of the year, versus 7.6 million activations in the December period. This explains, along with a significantly lower churn rate, why wireless margins were so strong, since AT&T didn't have to spend a lot of money on handset subsidies. Still, we are not overly concerned with the current lack of phone momentum, and believe it will improve as the company transitions to a tightened upgrade policy in the coming quarters.

In addition, AT&T is gaining ground in the newer tablet space, which should offset any slowdown in the phone business going forward. And the wireless operations are getting a boost from U-verse, the company's new video service that is steadily gaining ground across the country.

In the wake of this somewhat mixed quarterly performance, we are leaving our share-net estimates for 2012 and 2013 unchanged at $2.35 and $2.50, respectively. We continue to like this Dow component for conservative investors seeking good risk-adjusted returns to 2015-2017. Despite the uneven wireless trends lately, AT&T's overall business and cash flow remains very stable, and it continues to reward shareholders with buybacks and a generous dividend policy.

About The Company:AT&T, formerly SBC Communications, is one of the world’s largest telecom holding companies and is the largest in the United States. Its traditional (SBC only) wireline subsidiaries provide services in 13 states, including California, Texas, Illinois, Michigan, Ohio, Missouri, Connecticut, Indiana, Wisconsin, Oklahoma, Kansas, Arkansas, and Nevada. The company also owns Cingular (now AT&T Wireless). It has made a number of acquisitions, including PacTel (April 1997), SNET (October 1998), Ameritech (October 1999), AT&T (November 2005), and BellSouth (December 2006). It operates a total number of consumer revenue connections of 45 million. In 2011, about 52% of its sales came from wireless, 23% from wireline voice operations, 22% were from the data segment, and the remainder from advertising.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.